The movie mogul of the Internet: YouTube

March 28, 2011: 1:24 PM ET

Google has long been a media company in denial. Now it's beefing up YouTube to become a studio system for a new era of content production. Keyboard cat, meet the evening news.

By Dan Mitchell, contributor

For more than half a decade, people  have been debating whether Google is a media company. The question is ultimately pointless, though it keeps being asked in large part because every time it comes up, Google (GOOG) peevishly insists that it's not a media company, it's a technology company. What's the difference? Just compare the stock performance and profit margins of the two industries. The company also wants to avoid the liabilities that might come from being perceived as a publisher, as opposed to an indexer, of content.

Whatever Google might say, though, of course it's a media company. It presents content to an audience, against which it sells ads. That it doesn't produce much of its own content is beside the point. Neither does Netflix. Neither do many cable TV channels, local stations, or distributors such as Buena Vista Television. All are media companies. The issue isn't whether Google is a media company, but what kind of media company it is. It's a new kind -- one that operates by the economics of the Internet, with no legacy ties to the economics of television, movies, or publishing.

It seems likely that, sooner or later, Google will have to drop the pretense. The company in recent months has placed a new emphasis its YouTube division. It has recently hired several big names – all "content" people -- from companies like Netflix (NFLX) and Paramount. It has made acquisitions to improve the quality of its offerings. It is planning to spend a reported $100 million to create new channels for celebrities , whom it will help create content and with whom it will share revenues. It has rejiggered its navigation to make it – somewhat – more like cable television and less like a place for people to post their wacky cat videos.

But the wacky cat videos are still important, and will remain a staple of YouTube. Such personal offerings (not just cats, of course, but homemade music videos, wedding videos, etc.) represent one of three strategies that YouTube is pursuing. The other two are mass entertainment and niche programming.

But by keeping as hands-off as possible in terms of production, YouTube has a distinct advantage over most firms that we think of as "media companies," such as movie studios or production houses: its marginal costs are nearly zero. That is, whether it's a cat video or a basketball game, the company spends about the same amount of money to present the video to the public, and whatever advertising revenue it earns is all gravy. If a silly amateur video like Rebecca Black's "Friday" goes viral , great. If people flock to the Al Jazeera channel, also great. YouTube doesn't much care what the video itself contains.

Which is why it's so strange that so many tech pundits seem so ready to pounce on this or that piece of news evidence that YouTube is getting into the content-production business, or becoming ("officially," as one writer recently declared) a "media company." Going wholesale into content production would go against Google's core strategy: to present (and profit from) the content of others while bearing as little of the risk and cost as possible.

But since YouTube wants to be in the high-end video business as well as in the cat video business, it has to  that the high-end stuff really is high end, even when it's produced by someone else. That's why it purchased  Next New Networks earlier this month. That company will help YouTube advise its content partners on how to create quality video. The move might make the line between producing and distributing a bit thinner, but it doesn't breach that line. YouTube won't be greenlighting anything, and content partners will continue producing whatever they want to produce. Quality is also behind the purchase  last week of Green Parrot Pictures, an Irish video-enhancement firm.

YouTube declined to make any executives available to comment on the record, though I talked to a couple of YouTubers, current and former, on background.

By keeping itself open to the entire range of video offerings, YouTube means to position itself to prosper no matter what the Internet/TV market ends up looking like. It is working to make deals with Hollywood producers for content to aim at a mass audience. But it also is creating (or allowing others to create) niche channels -- and that might be where the best opportunities lie.

Cable has splintered television viewing over the years into smaller and smaller niches. The Internet is continuing the process. So, for example, while cable makes a ridiculous number of cooking shows available, there could be even more  -- and more specialized -- such shows on the Internet. As one YouTuber suggested, there could be a whole channel devoted to vegan cooking, or one devoted to surfing. Such channels would make no economic sense on cable, but they might on the Internet.

"The value of cable is silos," says Jeffrey C. Ulin, author of "The Business of Media Distribution." On YouTube, he says "there is an infinite degree of slicing and dicing that's possible."

Of course, it' not yet clear that such niches will work economically, even online. But YouTube itself isn't gambling much on the outcome – it's simply making the platform available. If the economics work out, YouTube could become even more of a cash cow. If they don't, it's not a huge loss, and with just a few hundred employees, the company can still make money from content partnerships and cat videos.

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